Rising US yields cool appetite for emerging assets

LONDON: US Treasury yields breaking through 3 percent and profit warnings from US companies pushed emerging stocks to a ten week low and knocked currencies on Wednesday, while Turkish markets awaited a key interest rate decision.

MSCI's benchmark emerging equities index fell 0.9 percent to February lows. Stocks in Asia racked up hefty losses with Hong Kong closing 1 percent lower while bourses from Russia to South Africa traded well into the red.

The losses came after US Treasury yields extended their overnight rise, reflecting the durability of the US economic expansion, accelerating inflation and concerns about increasing debt supply.

Adding to the woes were warnings from US bellwether companies that boom corporate earnings may be near their peaks, which weighed on developed markets.

Indonesian stocks racked up some of the heftiest losses, falling more than 2 percent to a four month low as the country's markets were hit by a combination of softer global stock markets and a slumping rupiah currency, which has already weakened 2.5 percent against the dollar year-to-date.

Southeast Asia's largest economy is especially vulnerable to sudden capital flight from its sovereign bond market, which could weaken the rupiah further.

Carry currencies elsewhere also suffered, with South Africa's rand weakening nearly 1 percent to its lowest since mid-January while Russia's rouble fell 0.2 percent, with oil prices holding their ground cushioning the blow.

Yet Turkey's lira, widely seen as one of the most vulnerable emerging currencies, strengthened 0.2 percent ahead of a key interest rate meeting where policy makers are expected to deliver a late liquidity window rate hike of 50 basis points to 13.25 percent, according to a Reuters poll.

Investors are betting that a snap election called for June 24 in a surprise move by President Tayyip Erdogan last week will give the central bank leeway to tighten and prop up the currency, which has weakened more than 7 percent since the start of the year.

"The odds are firmly skewed in favour of Turkey's central bank raising interest rates today as the outlook for inflation has worsened due to the sharp fall in the value of the lira to record lows against the dollar and the euro," wrote Rabobank's Piotr Matys in a note to clients.

"Perhaps far more importantly, President Erdogan's announcement that Turkey will hold early presidential and general elections in June provided policy makers with more room for manoeuvre."